When thinking about investment performance in the insurance industry, I'm reminded of a quote from the movie Bull Durham when Nuke LaLoosh said, "A good friend of mine used to say, 'This is a very simple game. You throw the ball, you catch the ball, you hit the ball. Sometimes you win, sometimes you lose, sometimes it rains.' Think about that for a while."
When you get right down to it, investing is a simple game. You buy securities, you watch them go up, you sell them, and then reinvest the proceeds. If your returns are greater than your costs, then you make a profit. But insurance investment managers, of course, know that it's not that easy.
To begin with, you have to diversify. It's important to watch allocations to avoid concentration in certain securities or asset classes. Investing in a broad array of asset classes will help control risk, as does employing multiple investment managers to take advantage of their areas of specialization. And then there's state compliance rules, regulatory reviews and company investment policies to follow.
Today, investing for insurance companies is a much more complicated game than Nuke LaLoosh could have imagined. How are insurance investment managers expected to sustain returns while also meeting the demands of NAIC guidelines, state regulators and company compliance?
With today's innovations such as business intelligence (BI) tools, investment managers can improve visibility across their investment portfolios, enhance transparency within portfolios, and deliver insights that can lead to better investments and generate greater total returns.
BI tools can give investment managers greater visibility into which asset classes or investment themes are performing best, and which managers seem to have the upper hand. With this information, it's easier to direct assets to managers positioned to perform well over the short term and long term, and to divest assets from managers facing performance challenges.
Transparency comes from being able to determine the true cause of outperformance and underperformance. Did a manager outperform because of a single bet on duration or an overweight to a lower credit quality? Has the performance been consistent, repeatable and explainable? With greater transparency comes an understanding of the sources of return and the path taken to get there.
[Previously from Vercellino: How Business Intelligence Can Help Insurers Overcome Compliance Challenges]
With visibility across multiple portfolios, and transparency down to the security level, comes the insight to make better decisions about your investment portfolio. BI tools give investment managers the ability to identify specific portfolios that have outperformed or underperformed, and then isolate the reasons for the performance delta. Armed with this information, they can then make adequately informed decisions about the manager (was the result due to the investment process, or just dumb luck?)
With all the information available on investment portfolios, it's easy to get overwhelmed by the sheer volume of data. But at the core, it's as simple as baseball – sometimes you underperform, sometimes you outperform, and sometimes it rains. Today's BI tools may not be able to predict the rain, but they can provide greater insight into performance, and a road map to do something about it.
About the author: John E. Vercellino, AAM, AIAF, is vice president of product management for SunGard's iWorks Financials solutions. He holds the Associate of Automation Management and Associate of Insurance Accounting and Finance designations from the Insurance Institute of America, and is currently an Expert Level candidate in the Certificate in Investment Performance Measurement (CIPM) program of the CFA Institute.
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